OT:RR:CTF:VS H131663 CMR
William R. Rucker, Esq.
Drinker Biddle & Reath, LLP
191 North Wacker Drive
Suite 3700
Chicago, IL 60606-1698
RE: Valuation of parts imported as vendor owned inventory; 19 U.S.C. § 1401a; sale
for export to the United States
Dear Mr. Rucker:
This is in response to your request, dated June 3, 2010, on behalf of your client, regarding the proper valuation of certain parts imported by your client under a “vendor owned inventory” program. On October 22, 2010, this office received additional information from you with regard to the contracts for sale of the subject merchandise. By letter dated, December 22, 2010, you submitted additional arguments regarding the proper valuation, specifically addressing reasons why you believed deductive value is not applicable. On February 28, 2011, you and your client met with CBP personnel to discuss this case and a follow-up submission, dated March 23, 2011, was received by this office.
FACTS:
Your client enters into contracts with unrelated suppliers for the purchase of certain parts to be used in the production of major aircraft assemblies. The contracts provide for the sale of the merchandise to your client after importation into the United States under “vendor owned inventory” (“VOI”) programs. The terms of sale for VOI merchandise shipments will generally be “FCA” (Free Carrier), but also may include use of “DDU” (Delivered Duty Unpaid). Under these contracts, the overseas vendor ships merchandise to a warehouse in the United States owned by your client and operated by your client and a third party. Your client will act as the importer of record for the VOI merchandise and upon importation, the merchandise will be delivered and received into the warehouse. Your client may provide assists to its foreign suppliers, including suppliers of VOI merchandise. It is unclear whether your client provides assists to only some suppliers, all suppliers or no suppliers of VOI merchandise.
The prices for the VOI merchandise are negotiated to cover specific time frames with prices being stable for a set period before a change in price occurs for another set period of time. You indicate that in most cases “if there is a price change, the cost of VOI merchandise will decrease after importation[.]” Therefore, you argue that the price on the pro forma invoice for merchandise at the time of entry will normally be the same price in effect at the time of withdrawal of the merchandise from your client’s warehouse, and, if not, the price is most likely decreased.
Title for the merchandise remains with the vendor until such time as the merchandise is withdrawn from the warehouse for use by your client. At that time, title transfers to your client and payment is made to the vendor at the then current invoice price. However, risk of loss transfers from the vendor to your client at the time the merchandise is delivered for exportation by the vendor (FCA) or delivered to the destination (DDU). While the merchandise is in your client’s warehouse as property of the vendor, your client has assumed the risk of loss.
While merchandise is in your client’s warehouse, it is tracked via your client’s Enterprise Resource Planning (“ERP”) system and the third party’s Warehouse Management System. You indicate that the target inventory cycle time is 60 days and that it will typically average less than 40 days.
On rare occasions, merchandise will be returned to a vendor, for example in the case of defective or non-conforming merchandise which may not be purchased. However, you have indicated that obsolete or surplus inventory, (should any VOI merchandise reach such status which you have indicated is unlikely) will be purchased by your client as that is its current business practice.
You submit that the VOI merchandise should be appraised under 19 U.S.C. § 1401a(b), transaction value, or 19 U.S.C. § 1401a(f), the “fallback” method, using the commercial invoice price as the value for the merchandise at the time of entry. You argue that the VOI merchandise qualifies for transaction value appraisement as all the elements for a bona fide sale for export to the United States exist and the delay of payment should not preclude such a finding.
ISSUE:
What is the proper method of appraisement for the VOI merchandise at issue?
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus five statutorily enumerated additions. 19 U.S.C. § 1401a(b)(1). In order for transaction value to be applicable for appraisement purposes, there must be a bona fide sale of merchandise for export to the United States.
In order to determine if the merchandise at issue is “sold” at the time of exportation to the U.S., we must examine whether the elements of a sale have occurred. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. § 1401a(b)(1) means a transfer of property from one party to another for consideration, citing J.L. Wood v. United States, 62 C.C.P.A. 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974). No single factor is decisive in determining whether a bona fide sale has occurred. CBP makes each determination on a case-by-case basis and will consider such factors as whether the purported buyer assumed the risk of loss and acquired title to the imported merchandise. An addition factor to consider is whether a price has been agreed upon between the parties and when payment for the goods will be made, if not already paid. Although the methodology for arriving at the price is not of concern, i.e., “it may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula,” an agreed upon price is an element of a bona fide sale.
From the facts presented, Customs and Border Protection (CBP) believes there is no bona fide sale for export to the United States at the time the subject merchandise is imported. Although your client assumes risk of loss for the imported merchandise generally from the time the goods leave a foreign supplier’s dock and at the latest when the goods arrive in its warehouse, it does not assume title to the merchandise nor is the sales price of the merchandise fixed until sometime after importation. The pro forma invoice represents the price at which merchandise is being sold at the time of importation, but as the sale of the merchandise does not occur until the merchandise is withdrawn from the warehouse by your client, the price for the merchandise may differ from the price at the time of importation. In addition, although indicated as “rare” instances, there may be imported merchandise that is not purchased by your client, but returned to the vendor. In Headquarters Ruling Letter (HQ) H083960, dated September 10, 2010, CBP discussed HQ H012659, dated November 14, 2007, and pointed out that in determining whether sales were sales for exportation in that decision, “CBP considered the following factors: the buyers were obligated to purchase the imported merchandise and to pay within a specified timeframe; the price paid conformed to the prices on the pro forma and commercial invoices; and risk of loss transferred at the place of shipment.” In the transactions at issue, there is no fixed time frame in which payment is due, only a suggestion that it will be generally within 40 to 60 days after the merchandise goes into the warehouse. As we have no fixed sales price at the time of importation, title does not transfer until after importation at which time the sale price is fixed, no fixed time frame in which payment is due, and some (though limited – e.g., defective or non-conforming) merchandise which may not be purchased, we do not have a sale for export to the United States and transaction value may not be used to appraise the subject merchandise.
The shipments at issue are consignment shipments. The goods are shipped and entered into the United States based on an understanding that they will be bought when needed, but they have not been bought, or sold, for export to the United States at the time of entry. The goods at issue are referred to herein as “vendor owned inventory”, but are also known as “vendor managed inventory.” This type of inventory arrangement is also known as “inventory consignment.” See “The Whose, Where and How of Inventory Control Design,” by Hau L.Lee and Seungjin Whang, Supply Chain Management Review, November 1, 2008, at p. 22. The goods at issue cannot be appraised based upon transaction value.
When imported merchandise cannot be appraised under transaction value, the other methods of appraisement set forth in 19 U.S.C. § 1401a are to be applied in sequential order. You argue that the goods cannot be appraised based upon the transaction value of identical or similar merchandise because your client is the only U.S. buyer of this merchandise as it consists of parts and components for specific aircraft. You argue that there are no sales of similar or identical merchandise made at or about the same time as the imported merchandise. Assuming you are correct, then we must consider whether the goods at issue may be appraised based upon computed value or deductive value.
With regard to computed value, you state that your client does not have the necessary information to calculate the material and processing costs incurred in producing the imported merchandise and does not have access to its suppliers profit and general expenses. As your client does not have access to the necessary information to calculate the computed value of the merchandise, computed value cannot serve as a basis of appraisement.
With regard to deductive value, the value of imported merchandise is based on the unit price at which it is sold in the greatest aggregate quantity in its condition as imported at or about the time of importation, or within 90 days of the date of importation, less certain deductions set forth in the statute. You argue that the deductive method cannot be used because the only sale in the United States after importation is from the suppliers to your client on an as-needed basis and that such sales are not in “commercial” quantities. You also argue that although most sales will occur in less than 40 days after the merchandise goes into inventory at your client’s warehouse, some merchandise may not be sold until after 90 days has passed.
The statute does not require sales in “commercial” quantities. In fact, it does not define any specific quantity necessary to be sold for use of deductive value. The statute does state, however, in relevant part that:
. . . the unit price at which merchandise is sold in the greatest aggregate quantity is the unit price at which such merchandise is sold to unrelated persons, at the first commercial level after importation . . . at which such sales take place, in a total volume that is (i) greater than the total volume sold at any other unit price, and (ii) sufficient to establish the unit price.
Deductive value is a method of appraisement most often used in cases of goods imported on consignment to be sold after importation. While the VOI merchandise at issue is sold after importation and is considered “inventory consignment” merchandise, we have considered your arguments against use of deductive value in this case and agree that it is not the appropriate method for appraisement as the buyer serves as the importer of the merchandise. In addition, the price which your client will pay for the merchandise is generally known, although not locked, at the time of importation. Although the VOI merchandise has not been “sold” for export to the United States, it is the subject of an incomplete sales transaction. For these reasons, deductive value is not in our view the appropriate method of appraisement for the VOI merchandise at issue.
When the value of imported merchandise cannot be determined under 19 U.S.C. §§ 1401a(b) through 1401a(e), it may be appraised under 19 U.S.C. § 1401a(f) on the basis of a value derived from one of those methods, reasonably adjusted to the extent necessary to arrive at a value. This is known as the "fallback" valuation method. Certain limitations exist under this method, however. For example, merchandise may not be appraised on the basis of the price in the domestic market of the country of export, the selling price in the United States of merchandise produced in the U.S., minimum values, or arbitrary or fictitious values. 19 U.S.C. § 1401a(f); 19 CFR § 152.108.
Section 152.107 of the CBP regulations (19 CFR § 152.107) provides: (a) Reasonable adjustments. If the value of imported merchandise cannot be determined or otherwise used for the purposes of this subpart, the imported merchandise will be appraised on the basis of a value derived from the methods set forth in §§ 152.103 through 152.106, reasonably adjusted to the extent
necessary to arrive at a value. Only information available in the United States will be used. (b) Identical merchandise or similar merchandise. The requirement that identical merchandise, or similar merchandise, should be exported at or about the same time of exportation as the merchandise being appraised may be interpreted flexibly. Identical merchandise in any country other than the country of exportation or production of the merchandise being appraised may be the basis for customs valuation. Customs values of identical merchandise, or similar merchandise, already determined on the basis of deductive value or computed value may be used.
(c) Deductive value. The “90 days” requirement for the sale of merchandise referred to in § 152.105(c) may be administered flexibly.
With regard to the VOI merchandise at issue, as the previous methods of appraisement are not applicable, we must appraise the merchandise under 19 U.S.C. § 1401a(f), the “fallback” method.
CBP has issued rulings on similar situations as presented in this case. For example, in HQ 548236, dated March 27, 2003, merchandise was entered based on the contract price in effect at the date of exportation. However, the price paid was not the price on the commercial invoice at the time of entry, but the contract price in effect at the time of withdrawal of the merchandise from warehouse by the buyer. As in this case, the buyer, or importer, of the merchandise did not take title or become obligated to pay for the merchandise until it was withdrawn from the warehouse where it was stored in inventory after importation. In addition, there was no requirement to pull the merchandise from the warehouse or pay for it within a set period. CBP determined that there was no sale for exportation to the United States and therefore, transaction value under 19 U.S.C. § 1401a(b) was inapplicable. However, after determining that the other methods of valuation under 19 U.S.C. §§ 1401a(c) through (e) were also inapplicable, CBP concluded that the commercial invoice price was acceptable as a reasonably adjusted transaction value under the fallback method of 19 U.S.C. § 1401a(f). The reasons for accepting the invoice price were that the buyer employed a just-in-time inventory system so that the imported merchandise would not remain in the warehouse very long and that most of the time, the price paid upon withdrawal from the warehouse would be the same price as shown on the commercial invoice. In addition, the assertion that most of the time the price would decrease after importation and thus the commercial invoice price would reflect a higher price was considered. See also HQ 548273, dated April 17, 2003, which presents a similar scenario, i.e., a just-in-time inventory system, likelihood that the price on the pro forma invoice would be the same as the price paid for the identical product being pulled from the warehouse, and likelihood that if the price changes after importation, it would be a price decrease. See also HQ 548574, dated March 17, 2005.
As the situation presented herein is substantially similar to the transactions considered in HQ 548236, HQ 548273, and HQ 548574, for the VOI merchandise at issue the commercial invoice may be accepted as representing a reasonably adjusted transaction value provided that, like actual transaction value of 19 U.S.C. § 1401a(b), it includes the value of any assists provided by your client, packing costs paid for by your client, and any other additions enumerated in 19 U.S.C. § 1401a(b). If your client is unable to calculate the value of additions to the commercial invoice price, it may wish to consider the Reconciliation Program for purposes of flagging the value issue and reconciling it with CBP at such time as your client has the necessary information to include any additions.
Additionally, as in HRL 548273 and HRL 548236, this ruling is being issued based on the assumption that the unit price for the imported goods, as it appears on the pro forma invoice, is the same as the price actually being paid for identical goods withdrawn from the warehouse on the same day, and this can be verified by CBP.
If the price paid on withdrawal from the warehouse increases from the price on the pro forma invoice, then this ruling may not be applicable in accordance with 19 C.F.R. § 177.9(b)(1). Consequently, if the price paid on withdrawal from the warehouse increases from the price on the pro forma invoice, your client should notify CBP of this fact, so that CBP is able to verify that a price increase indeed is only occurring rarely and whether the ruling is still applicable.
HOLDING:
With regard to VOI merchandise imported by your client, appraisement is to be based upon the fallback method, 19 U.S.C. § 1401a(f). The commercial invoice presented at the time of entry may be accepted as representing a reasonably adjusted transaction value provided that it includes the value of any additions provided by your client enumerated in 19 U.S.C. § 1401a(b).
A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction. Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch